The Directorate General (DG) of Safeguards has recommended a 20% safeguard duty on import of hot-rolled flat products of non-alloy and other alloy steel in coils of a width of 600mm or more'' for 200 days. The duty has come on the back of; around a 20% decline in hot rolled coil (HRC) domestic prices; increased steel imports from China, Russia, and Ukraine as well as from free-trade-agreement (FTA) countries and significant profitability and market-share declines at Indian steel producers.
BofA Merrill Lynch (BofA-ML), said, ''Safeguard duty imposition would likely raise steel prices by 7-8%, which in turn could lead to 35-40% & 20-25% upgrade in consensus EDITDA estimates, respectively for Steel Authority Of India (SAIL) and JSW Steel.''
If the safeguard duty is imposed, BofA-ML expects that Indian steel would start trading at a 10-12% discount to imported steel costs. Even after assuming the new pricing normal will be at a 5% discount to the imported steel cost, Indian steel prices have 7-8% potential upside from the present level.
Overall steel imports rose 67%, imports from FTA countries rose a whopping 96% in the same period. As per the FTAs, these countries are liable to pay only 1.2% import duty against the normal 12.5%. Interestingly, much of the import rise was driven by commodity-grade HRCs, which rose 143%.
The current proposal is very similar to the safeguard duty on aluminum rolled products. In both cases, imports had led to declining market share of domestic producers and they started making losses. However, while aluminum rolled product capacity utilization had started to fall, in the case of steel, capacity utilization is stagnant, but inventory is increasing.
Given the strong case of safeguard duty, BofA-ML believes that the Finance Ministry will approve the imposition of a provisional safeguard duty on steel. The DG is undertaking the enquiry for the imposition of final safeguard duty which can remain in force for long term. As highlighted in earlier paragraphs the case for steel makers appears to be strong. Assuming there is not any significant price recovery in the global market, the final duty may remain for a longer term compared to aluminum flat products.
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